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Vertical Tax Externalities in the Theory of Fiscal Federalism

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  • Michael Keen

    (International Monetary Fund)

Abstract

Federal structures create the possibility of vertical tax externalities between levels of government, with the private sector's response to the tax policy decisions of one level affecting the tax base of the other. Such effects arise most obviously when both levels of government co-occupy the same tax base. This paper reviews and extends recent results on the implications of such externalities for the relationship between state and federal tax rates, the equilibrium levels of these taxes, the (ir)relevance of experience in federal countries for analyzing international tax issues, the pattern of intergovernmental grants, and the assignment of tax powers.

Suggested Citation

  • Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
  • Handle: RePEc:pal:imfstp:v:45:y:1998:i:3:p:454-485
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    More about this item

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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